Automated market makers have gone mainstream over the last few years due to their ability to eliminate intermediaries and address the issue of limited liquidity. Balancer is one of these innovative platforms that aim to revolutionize the way people trade. It has replaced traditional transaction methods such as order books and facilitates the exchange of ERC-20 tokens through the use of smart contracts. We’ll get down to the nitty-gritty of what this platform is all about.
In this guide
Background and history
In early 2018, Balancer Labs, a technology and research firm acquired Balancer, a research initiative run by Blockscience. This project aimed to provide liquidity on your terms and create an automated market maker pool capable of providing diverse assets. This network feature establishes a platform that is essentially identical to Exchange Trading Funds (ETFs) in that it may rebalance continuously. Still, the distinction is that it will compensate you for providing liquidity, and not only for buying and holding tokens.
Balancer network connects a liquidity provider to a pool to execute a swap transaction. Furthermore, it is a non-custodial exchange that allows traders to swap assets for a fee that goes to pool liquidity providers.
Decentralized exchanges such as Kyber and Uniswap use Balancer protocol.
When it finally launched in March 2020, it was not as decentralized as other DeFi platforms. At the time, it was simply referred to by its company name. Balancer Founders, Fernando Martinelli, an entrepreneur, and Market Maker member with extensive knowledge of DeFi space, and Mike McDonald, CTO and co-founder of Balancer, have been critical to the project’s success. Mike is a seasoned security engineer. Balancer labs funded the project with a seed round of $3 million.
Since mid-2020, the network has developed a liquidity mining system in which liquidity providers to the Balancer pool can earn BAL tokens. Additionally, they have introduced staking, where miners will earn income for holding their assets. In Aug. 2020, BAL token holders voted to reward liquidity providers that include BAL in their pool. Similarly, BAL allows users to vote on and control the platform, ensuring that it functions appropriately while rewarding adopters to enhance liquidity.
What is Balancer?
Balancer is an AMM that aims to create a liquidity pool to exchange various assets. It operates without the use of a third-party or centralized system. An AMM is a collection of algorithms that establish trading rules, such as facilitating orders and setting asset values.
Balancer is a decentralized exchange built on the Ethereum blockchain. It makes it easier for consumers to use the platform if they have a compatible wallet, such as MetaMask or Coinbase, and also to invest in pre-existing pools to earn trade yields. Since its inception, Balancer has become one of the most popular decentralized exchanges (DEXs) and the largest DeFi apps in terms of the trading volume.
It implements the AMM model, rather than the typical bidding and asking prices that most centralized systems adopt. This combination of elements results in Balancer being a decentralized system capable of market control. Other platforms that follow the same principle include Uniswap and Curve.
Balancer is distinctive because its protocol can support several assets, unlike Uniswap, which only supports two. Additionally, it has a predetermined trade cost agreed upon by pool creators. As with many DeFi apps, it has its own token BAL, enabling users to vote, govern the platform, and earn tokens by providing liquidity to the network.
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How does Balancer work?
As an AMM, Balancer can evaluate the value of an asset by comparing it to other assets and the liquidity pool. When users add or remove assets from the liquidity pool, the ratio immediately changes, resulting in a change in the price of each asset. As with many AMM networks, Balancer can route trades and determine the percentage of each token to calculate the price of an asset for its users. Swaps can be direct (ETH to BAL) or indirect (ETH>USDT>BAL).
Below are three distinct pools:
- Shared – This pool is open to anyone willing to provide liquidity to the network, remove or swap tokens. Besides that, it has fixed parameters (fees, asset types, and weights). This is helpful for customers with small holdings who wish to earn fees from the most popular liquidity pools.
- Smart – This is a customized program type of pool regulated and managed by smart contracts. It ensures that the network has the correct digital asset ratio regardless of the digital currency used. Additionally, this capability enables additional functionality, such as weights or the creation of index funds capable of tracking a property portfolio.
- Private – In this case, only the pool owners can add or remove liquidity and define settings such as fees, weightings, and the assets accepted. This pool is ideal for users with large portfolios who wish to earn fees on their digital assets.
Balancer vs. Uniswap
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When you compare these two platforms, they are both top-ranking decentralized exchanges (DEXs) with specific unique characteristics, even though one may appear to be more popular. The following are critical differentiating characteristics to consider that may assist you in making an excellent choice.
Uniswap
- Uniswap is credited for pioneering the AMM concept, enabling users to provide as much liquidity as possible while also trading tokens. Additionally, the network lacks a decentralized oracle, so it rewards arbitrageurs for keeping prices as low as possible.
- Through the use of LP and token swaps, Uniswap users can purchase UNI tokens, which give voting rights to future platform advancements and governance.
- Uniswap has the most assets, making it a more attractive option for high-volume asset traders. Currently, the DEX offers liquidity that none of the DeFi exchanges can match. Therefore, it is prudent to continue with Uniswap if you wish to purchase or sell cryptocurrencies with the lowest possible slippage.
Balancer
- The primary distinction is that Balancer may manage up to eight digital assets in a single liquidity pool. This means that a liquidity pool can store a large amount of liquidity of various forms, which benefits its users.
- Liquidity creators can change trading fees in the Balancer liquidity pool. This makes the market more competitive, as users seek better liquidity to profit from their trades.
- Liquidity pool assets are arbitrary, meaning users do not have to supply the same liquidity when trading on a pool.
Roadmap and development
11 May 2021 V2: Balancer unveils its v2 protocol upgrade, which aims to address the issue of DeFi liquidity as it offers a generalized AMM. V2 enables aggregates of liquidity in one vault, so users can maintain the internal balance of the token they hold.
The 2022 Year Of DAO: Due to their initial success with the protocol phase, Balancer will now focus on the DAO2DAO framework to provide building blocks for other platforms to employ. The team expects to strengthen the Balancer’s ties to other networks based on its protocol.
What is BAL?
BAL is a native Balancer token built on the Ethereum blockchain and a type of ERC-20 standard. BAL can regulate Balancer protocols and development, including voting on proposals and significant fundamental changes. This feature distinguishes Balancer from other DeFi protocols as a decentralized autonomous organization (DAO). Moreover, the proliferation of balancers in DeFi space has resulted in the need for BAL in areas other than voting.
Tokenomics
When Balancer hit the scene, it did not have its token. However, on Jun. 23, 2020, the company began releasing its native token.
Balancer initially distributed 25 million tokens to its founders, investors, and key developers, all of which were subject to an ownership period. The total amount of BAL allocated was 100 million BAL.
- 5 million donated to its ecosystem to support protocol development and another 5 million will fund future use.
- The remaining 65 million will be allocated to its liquidity providers, with 7.5 million a year or 145,000 BALs designed to be mined and given weekly.
- The network will supply 1.76 million annually based on the company’s liquidity provider’s share.
As stated, BAL to liquidity provider is 145,000 every week. This shows that the original 25% assigned token will see a 30% supply of inflation. This rapid inflation should increase the governance privileges of balancer protocols for users who gain these tokens.
With a weekly supply rate of 145,000 BAL, it will take eight good years to achieve a 65 million BAL. The token currently has a total supply of 35,725000 BAL, of which 6,943,831 have been circulated.
According to CoinMarketCap, this token ranks 394th in the digital currency space, with a price of $13 at the time of this writing.
Is Balancer coin a good investment?
Balancer has grown thanks to its integration with other exchanges, including Coinbase Pro, Binance, and the ICONOMI platform, and its presence on Gemini. The more appealing feature that has increased user interest in Balancer is the generalization of the Uniswap Bonding Curve feature to a more advanced option of the multidimensional surface. These unique features enable Balancer to hold more than one token, whereas Uniswap can only have two. As the token develops popularity, other exchanges are expected to open, giving investors more options to buy it.
This network has made significant strides, including the use of BAL tokens to regulate the platform. Furthermore, BAL serves as a reward for its users’ efforts to supply liquidity while protecting them from impermanent loss. Equally important, Balancer provides a self-balancing portfolio tool that works without incurring portfolio management fees. This strategy has given this network an advantage over its competitors and increased the token’s popularity and acceptance rate.
With all the progress Balancer has been working on to make trading easier for its users, it is evident that this platform could be worth investing in, though you should do your homework first before making a decision.
How to buy Balancer (BAL)?
To trade on Balancer, you’ll need a Web 3.0 digital wallet like MetaMask. It is a digital wallet with a browser extension that connects your digital assets to decentralized applications such as Balancer.
- To begin, you must navigate to the Balancer website.
- Once on the website, no registration or know your customer (KYC) is required. All you need to do is connect your MetaMask wallet, and you’re ready to go.
- Select the cryptocurrency you wish to buy or sell from the drop-down menu. This can be accomplished by entering the name or symbol and proceeding to the next step.
- If you are satisfied with your currency name selection, enter the amount you intend to sell or buy.
- While selecting the amount to choose from. Balancer will present you with many options, as it will filter many pools containing the token you requested. As you make your picks, keep in mind that the higher your transaction amount, the more liquidity will be required to fill it. Which means slippage will increase. Slippage is a phrase that refers to the divergence of orders throughout the trade process between order and execution. Once this is complete, you’ll have the option of viewing your anticipated slippage or even adding extra limits to help you manage your payments.
- Finally, click “Swap,” and MetaMask will prompt you to confirm the transaction. Following that, the cryptocurrency you sold will be hidden from view, and the token purchase will appear.
Balancer — a wider trend in DeFi
Balancer is one of the most advanced decentralized exchanges available in the DeFi space. This network is developing innovative functionalities and has created its own native BAL coins to aid in platform governance. The platform is beneficial for investors seeking a maximum price on an exchange or who intend to use an idle portfolio. That said, its private pool is an excellent option for large-scale investors and portfolio managers.
Frequently asked questions
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